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5 reasons why you must invest in mutual funds

August 20, 2014 09:21 IST

5 reasons why you must invest in mutual funds

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P V Subramanyam

Why must you invest in a mutual fund? This question can come up at any stage in your life.

For some people it comes up while in college and for some it comes up when they are two years away from retirement.

But if you are a fresh employee or are married and hoping to buy a new house, this is a good question to ask. Even if you are someone who has saved money in a bank account/PPF/NSC (as a tax planning exercise) but have not (NEVER) invested, this is, again, a good question to ask.

We give you, not one, but five good reasons why you must invest in mutual funds at an early age.

1. Only investing converts your savings into assets growing at a real rate: You need to invest if you want your money to beat inflation. This sustained price increase over a long time completely annihilates the nominal value of your debt savings.

2. Mutual funds are managed by reasonably smart fund managers. Do not expect them to do any great magic, but it is their full time duty and like most of us do a decent job. However if somebody tells you that they know better, they are smarter, they are better educated -- it is true for 5 of them. There are about 1000 of them. So the 'general' kinda stuff does not work. It would be like looking at Sachin Tendulkar and saying 'cricketers in general make a lot of money'. However, many of them are very competent.

3. Helps you diversify: If you have Rs 50,000 to invest -- on a per month basis, I can assure you it is impossible to create a portfolio like ICICI Prudential Discovery, Franklin India Bluechip, HDFC Top 200, etc. or that kind.

4. Helps you invest systematically on a regular basis. For a salaried guy this is not a bad thing.

5. Well regulated industry: the shenanigans of the industry are not easy to ignore, but it need not scare you out of the industry. Over long periods of time equities have given good returns. In a country where the equity returns are tax free, come and at least dip your feet.

Warning: I am a deep sea scuba diver with sea swimming as a long term hobby. Learn swimming before you attempt scuba diving. It helps. That is all.

Caveat: Investments are subject to market risk. If you do not understand markets or risk, I have no clue how you can understand this statement.


Photographs: Utam Ghosh/Rediff.com